Download Endowment? - Office of the Vice President for Finance and Treasurer

Endowment Funds
User Guide
Document Last Updated December 18, 2003
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Financial Training Department
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Table of Contents
What is an endowment? .......................................................................................3
True Endowment....................................................................................................3
Term Endowment ...................................................................................................3
Funds Functioning as Endowment (FFE)/Quasi-Endowment ......................................3
How are University Gifts Invested? .....................................................................4
Associated Investments Fund (AIF) .........................................................................4
Temporary Investments Fund (TIF) .........................................................................4
Other Investments .................................................................................................4
Increasing or Decreasing the Amount of Investments ......................................5
Reinvestment .........................................................................................................5
Liquidations ...........................................................................................................5
What is the Spending Rule? .................................................................................6
What is an “Underwater” Endowment? ...............................................................7
Finding ‘STAT’ rates in BEN Financials .................................................................8
Determining the Market Value of an Endowment Fund* ................................. 11
Determining Income for New Gifts (Net Gift Calculation) ............................... 12
How Endowment Income is Posted ................................................................... 13
Budgeting Endowment Funds ............................................................................ 22
Carry-forward ...................................................................................................... 22
Anticipated Current Income .................................................................................. 22
Monitoring Income and Expense Activity .......................................................... 24
Appendix A: Common Abbreviations ................................................................ 25
Appendix B: Glossary of Terms ......................................................................... 26
Appendix C: Gift and Endowment Asset and Revenue Object Codes .............. 27
Revision History .................................................................................................. 29
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Financial Training Department
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What is an endowment?
An endowment is a “permanent fund of property or money bestowed upon an institution or a person, the
income of which is used to serve the specific purpose for which the gift was intended”. 1 Essentially an
endowment is a gift fund where the original gift is invested. For this reason, you should be familiar with
the material covered in the Gift Funds document prior to reading through this information.
There are three main categories of endowments funds at the University of Pennsylvania.
True Endowment
True endowments are gifts where the donor has stipulated, as a condition of the gift instrument, that:

the principal is to be maintained inviolate and in perpetuity

the principal is to be invested for the purpose of producing present and future income which may
either be expended or added back to principal
Examples of true endowments would include an endowed professorship or a permanent endowment
related to a specific academic program. The original gift and principal is recorded in Net Asset Class
(NAC) 2 (Permanently Restricted)
Term Endowment
Term endowments are gifts where the donor has designated the gift as endowment, but has given the
University the right to invade principal either upon passage of time or the occurrence of an event. This is
sometimes referred to as a “wasting” endowment, because the principal can begin to waste away after
the occurrence of the event or lapse of the specified period of time. The original gift and principal is
recorded in Net Asset Class (NAC) 1 (Temporarily Restricted)
Funds Functioning as Endowment (FFE)/Quasi-Endowment
The two terms “Funds Functioning as Endowment” and “Quasi-Endowment” both refer to gifts the
Trustees of the University of Pennsylvania, rather than donors, have determined are to be invested as
endowment. Since these funds are internally designated rather than externally restricted, the Trustees
have the right to decide at any time to expend the principal. The gift and principal for these funds is
recorded in Net Asset Class (NAC) 0 (Unrestricted).
1
Dictionary of Business Terms
In order to get an accurate picture of any type of endowment, it is
necessary to run a 114.ORG report to see activity in all net asset
classes. 10X.ORG reports do not provide enough detail – see the
Gift and Endowment Reports Guide for more information.
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Financial Training Department
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How are University Gifts Invested?
Associated Investments Fund (AIF)
Most endowment assets are invested by the University. The majority of Penn’s endowment investments
are held in the Associated Investments Fund (AIF), a pooled vehicle, much like a balanced mutual fund.
The University includes a standard provision in most of its endowment agreements which states “The
University will invest the gift in an endowed fund which it may pool and manage with its other endowed
funds in accordance with regular University investment and management policies.”
The AIF holds domestic and international equity, fixed income and high-yield securities, real estate and
other investments. The AIF’s performance and asset allocation is often cited when information of this
type is given for “Penn’s endowment”. Performance is computed and reported on a total return basis,
which includes both portfolio appreciation as well as income generated.
Temporary Investments Fund (TIF)
Short-term funds, except those held as a buying reserve for individual funds (i.e., “carry-forward
balances”), will be invested in the Temporary Investments Fund (TIF). This includes capital gifts and
grant funds requiring interest on unexpended balances. With the exception of grant and capital gift
funds, all requests for TIF must be approved by the Senior Vice President for Finance. This fund’s asset
allocation is generally designed to maximize gains over a shorter period of time than the Associated
Investments Fund (AIF).
Other Investments
Although the majority of Penn’s investment holdings are held in the AIF, a portion of Penn’s endowment
contains securities held and managed outside of these funds. If your endowment fund contains any of
these investments, the 114.ORG report will have a balance in the “Direct Holdings” category.
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Financial Training Department
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Increasing or Decreasing the Amount of Investments
Reinvestment
Reinvesting is moving unused, available funds from derived cash to AIF to increase the future annual
income of your endowment. Funds which are fully reinvested will have the reinvestment flag turned to
“Y” (yes; reinvest). Funds which are fully reinvested will still have gross and net AIF income available for
spending indicated in the upper right-hand corner of the 114 reports, however all yield will be directed
back into the AIF fund (not into derived cash). You can have a portion of the funds reinvested, yet still
have the reinvestment flag set to “N”.
Sometimes reinvestment is stipulated as a condition of the gift agreement. For certain agreements (the
most common example is an endowed chair), the University will receive a gift where no action can take
place until that gift grows to a higher amount. In other cases, a decision will be made to reinvest funds
not at the behest of the donor, but by authorized University administrators, in order to grow the size of
the endowment. This is generally done when additional money will be required to meet the obligations
of the original gift. In order to have money reinvested, contact Trust Administration at
[email protected].
Liquidations
In certain rare instances, a fund may be liquidated. Liquidation involves the selling of endowment assets
in order to provide additional derived cash for spending. For certain funds, where the principal gift is
permanently restricted, this may not be permitted at all. The opposite of reinvesting, liquidating
endowment assets should only be done in extenuating circumstances, because you permanently reduce
the amount of future income generated by the endowment.
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Financial Training Department
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What is the Spending Rule?
For endowment accounts, the spending rule provides a guaranteed income figure that determines how
much money is available to spend for a given account in a given fiscal year. The figure is a percentage
of the endowment fund’s market value and is determined by the Office of Budget and Management
Analysis and the Office of Investments and approved by the Trustees. The spending rule percentage is
based on a three-year moving average of investment returns, lagged by one year.
Example: Investment returns in FY00, FY01 and FY02 are the basis for FY04 spending rule
This guaranteed spendable income is received in equal increments during the 12 periods of the fiscal year
(with a one-month lag – e.g., AUG-02 through ADJ-03). Any investment income earned in excess of the
guaranteed amount specified by the spending rule is reinvested in the endowment. This amount is
recorded separately from principal gifts to the endowment (in object codes 1713-1715 for AIF
investments). If there is a period where the actual market return is less than the spending rule
guarantee, existing spending rule assets will be reduced (i.e., previously-earned appreciation will be
spent) to provide additional income so that the fund still generates the amount of spendable income
guaranteed by the spending rule.
The spending rule is designed to:

Aid in preserving the long-term objectives of the endowment

Ensure smooth and predictable distributions

Protect investments against inflation
Spending Rule example:
Assume that a gift of $100,000 earns a 6% rate of return after being invested in the stock market
($6,000). Assume that this 6% rate of return consisted of 2.5% income earned and 3.5% market
appreciation. If the spending rule were set at 4.7%, then you could spend up to 4.7% of original market
value of the endowment ($100,000), or $4,700. Since the endowment only earned $2,500 (2.5% of
$100,000) in income, $2,200 of previously-earned appreciation would be spent to ensure that $4,700 was
available to spend. $3,500 (3.5% of $100,000) of appreciation is invested back into the fund.
Note: Donor-reinvested funds do not participate in the spending rule; all of their income is reinvested
into principal.
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What is an “Underwater” Endowment?
With a new endowment, the gift may not generate enough income to meet the amount guaranteed by
the spending rule, particularly when the stock market is not achieving high returns. In this case, there
would be no reserve of spending rule assets to be reduced in order to meet the guaranteed income
figure. The balance of the spending rule assets would be reduced anyway, producing a negative balance
in the endowment’s spending rule assests. When an endowment fund carries a negative balance in its
spending rule assets, it is sometimes referred to as an “underwater” endowment – basically, the fund is
“borrowing” against future market appreciation.
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Financial Training Department
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Finding ‘STAT’ rates in BEN Financials
Five special “STAT” object codes are used by BEN Financials to calculate monthly guaranteed income and
spending rule distributions. They include:

AIFG (Associated Investments Fund Guaranteed Rate)

AIFS (Associated Investments Fund Spending Rule Rate)

AIFT (Associated Investments Fund Total Income)

AIFR (Associated Investments Fund Realized Gain/Loss Rate)

AIFU (Associated Investments Fund Unrealized Gain/Loss Rate)
The total actual rate of return (AIFT) for endowment funds is equal to the guaranteed rate of return
(AIFG) plus the spending rule rate of return (AIFS).
Example:
Assume the actual rate of return for an endowment (AIFT) is 2.5% and the spending rule guaranteed
rate (AIFG) is 4.7%. Since AIFT = AIFG + AIFS, 2.5 = 4.7 – 2.2. In this case, the spending rule rate of
return (AIFS) is a negative value (-2.2).
To find the “STAT” rates that BEN Financials uses to calculate monthly guaranteed income and spending
rule distributions:

Click on Inquiry> Account navigational path. Click on [Open] or double click on the
path’s end.
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Financial Training Department
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Finding ‘STAT’ rates in BEN Financials (continued)



Enter the range of Accounting Periods to include in your query
Select from the list of values or enter STAT in the currency field
Leave the Primary Balance Type tab set at the default, Actual
Change
the
currency
field to
STAT
Click in
this grey
field to
bring up
the Find
Accounts
Dialog
Box.

Click in the grey Accounts box in order to
bring up the Find Accounts dialog box

Enter the appropriate “STAT” rate (e.g.,
AIFG) in the object code field and click on
[OK].
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Financial Training Department
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Finding ‘STAT’ rates in BEN Financials (continued)
Click [Show Balances]
Use Period to Date
(PTD), not Year to Date
(YTD) amounts
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Financial Training Department 10
Determining the Market Value of an Endowment Fund*
There are three basic values that can be determined for all endowment funds:

Book Value is the aggregate amount of all gifts to the endowment fund plus any income reinvested
in the fund
Book value can be obtained by totaling the AIF book value (NAC 2/1/0 YTD balances in object code
1710) and the value of any current gifts (see the next section on how to calculate net gifts)

Adjusted Cost is the book value plus any Realized Gains or Losses (actual gains or losses attributed
to the sale of underlying securities)

Market Value is the Adjusted Cost plus any Unrealized Gains or Losses (“paper” gains or losses
from changes in the value of assets that continue to be held)
* consult with your development officer before releasing this information to donors
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Financial Training Department 11
Determining Income for New Gifts (Net Gift Calculation)
Net Gifts are calculated by adding together period to date (PTD) activity in

Object Code 4400 (Gift Revenue)

Object Codes 1230, 1238 (Contributions Receivable)

Object Code 4704 (Realized Gain/Loss from Gifts of Securities)

Object Codes 1780, 1781, 1782 (Gift Investments)
This total is the new available gifts for a given fund. New available gifts will be invested in the following
month after the close of the period (e.g., for the period ending 3/31/04, investment occurs effective
4/1/04). These monies are reflected in the period to date ‘1710’ AIF Book value in the APR-04 period.
Multiply the above market value (remember for a new gift, the investment book value is equal to the
market value – there have not yet been any unrealized gains or losses) by AIFG (Associated Investments
Fund Guaranteed Rate) of the following month. This will equal the monthly distributable guaranteed
income. Multiply by the number of periods remaining in the fiscal year to arrive at the fiscal year
guaranteed income. Decrease that amount by the overhead charge (20%) to get net spendable income
on a new gift.
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Financial Training Department 12
How Endowment Income is Posted
Let’s examine a sample new endowment account so we can see how income is posted. Assume that a
new gift of $100,000, designated by the donor as a true endowment, is received in DEC-XX. This gift
would be recorded in the BEN Financials General Ledger as follows:
Debit (DR)
Credit (CR)
Object Code 11XX
Object Code 4400 (Gift Revenue General)
(appropriate Cash object code)
The result would appear on your DEC-XX 114.ORG report under “Derived Cash”. True endowments are
permanently restricted, so the balance would appear in NAC 2:
UNRESTRICTED
NAC: 0
------------
TEMP RESTRICTED
NAC: 1
---------------
ASSETS
Derived Cash
Investments (Fair Market Value):
Book Value – Orig Gift:
Direct Holdings
AIF
PERM RESTRICTED
NAC: 2
--------------100,000.00
------------
---------------
---------------
------------
---------------
---------------
------------
---------------
--------------100,000.00
Total Book Value – Orig Gift:
Book Value: Spending Rule
Realized Gains/Losses
Unrealized Gains/Losses
Total Investments (Fair Mkt Value)
TOTAL ASSETS
Note: you can only run 114.ORG reports for
a closed period, so you would only be able to
run the DEC-XX report for a fund in the JAN(XX+1) period. Example: to run the DEC-03
report, you must be in JAN-04.
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Financial Training Department 13
How Endowment Income is Posted (continued)
At the beginning of the next month, JAN-(XX+1), the gift is invested in the AIF, resulting in the following
entry in the BEN Financials General Ledger:
Debit (DR)
Credit (CR)
Object Code 1710
Object Code 11XX
(AIF Investment Book Value)
(appropriate Cash object code)
On the JAN-(XX+1) 114.ORG report, you would see the gift move from “Derived Cash” to “AIF”:
UNRESTRICTED
NAC: 0
------------
TEMP RESTRICTED
NAC: 1
---------------
PERM RESTRICTED
NAC: 2
---------------
------------
---------------
100,000.00
--------------100,000.00
------------
---------------
------------
---------------
ASSETS
Derived Cash
Investments (Fair Market Value):
Book Value – Orig Gift:
Direct Holdings
AIF
Total Book Value – Orig Gift:
Book Value: Spending Rule
Realized Gains/Losses
Unrealized Gains/Losses
Total Investments (Fair Mkt Value)
TOTAL ASSETS
….
--------------100,000.00
--------------100,000.00
Financial Training Department 14
How Endowment Income is Posted (continued)
Since the gift is now invested, it will begin earning income and experiencing gains and losses. The
activity from JAN-(XX+1) will be posted in FEB-(XX+1). In order to determine the amount of income
posted, we’ll assume we’ve obtained the following “STAT” object codes for FEB-(XX+1)1:

AIFG (Guaranteed Rate) = 0.00432247

AIFR (Realized Gains) = (0.00004364)

AIFU (Unrealized Gains) = (0.00817600)

AIFS (Spending Rule) = (0.00228509)
To determine the amount of money available for spending, simply take the original gift and multiply by
AIFG ($100,000 x 0.00432247 = $432.247). This $432.25 includes overhead, however. The actual
amount that can be budgeted for expenses is 80% of that amount (100% - 20% overhead), or $345.80.
This amount - $345.80 – appears in “Derived Cash” in the unrestricted net asset class (NAC 0).
Realized gains post as follows:
Debit (DR)
Credit (CR)
Object Code 1711
Object Code 4711
(AIF Investment Realized Gain)
(AIF Income Realized Gain)
If there is a realized loss, the debit and credit object codes would be reversed (i.e., 1711 would be
credited and 4711 would be debited). In our example, there was a realized loss, because AIFR is
negative. To calculate, take the original gift and multiply times AIFR ($100,000 x -0.00004364 = -4.364).
This amount, ($4.36), appears in “Realized Gains/Losses” in the temporarily restricted net asset class
(NAC 1).
Unrealized gains post as follows:
Debit (DR)
Credit (CR)
Object Code 1712
Object Code 4712
(AIF Investment Unrealized Gain)
(AIF Income Unrealized Gain)
If there is an unrealized loss, the debit and credit object codes would be reversed (i.e., 1712 would be
credited and 4712 would be debited). In our example, there was an unrealized loss, because AIFU is
negative.
1
Note: the rates used in this example are from the actual period FEB-03
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Financial Training Department 15
How Endowment Income is Posted (continued)
To calculate unrealized gains/losses, take the original gift and multiply times AIFU ($100,000 x 0.00817600 = -817.60). This amount, ($817.60), appears in “Unrealized Gains/Losses” in the
temporarily restricted net asset class (NAC 1).
Spending rule reinvestment posts as follows:
Debit (DR)
Credit (CR)
Object Code 1713
Object Code 4713
(AIF Spending Rule Investment Book Value)
(AIF Spending Rule Income)
If the spending rule income is negative (i.e., the actual rate of return is less than the guaranteed rate of
return on the endowment), the debit and credit object codes would be reversed (i.e., 1713 would be
credited and 4713 would be debited). In our example, this was the case, because AIFS is negative. To
calculate, take the original gift and multiply times AIFS ($100,000 x -0.00228509 = -228.509). This
amount, ($228.51), appears in “Book Value: Spending Rule” in the temporarily restricted net asset class
(NAC 1).
This gives us the complete picture for the FEB-(XX+1) 114.ORG report:
UNRESTRICTED
NAC: 0
-----------ASSETS
Derived Cash
Investments (Fair Market Value):
Book Value – Orig Gift:
Direct Holdings
AIF
TEMP RESTRICTED
NAC: 1
---------------
PERM RESTRICTED
NAC: 2
---------------
------------
---------------
100,000.00
--------------100,000.00
------------
(228.51)2
(4.36)3
(817.60)4
---------------
-----------345.80
--------------(1,050.47)
345.801
Total Book Value – Orig Gift:
Book Value: Spending Rule
Realized Gains/Losses
Unrealized Gains/Losses
Total Investments (Fair Mkt Value)
TOTAL ASSETS
Original
Original
3
Original
4
Original
1
2
gift
gift
gift
gift
($100,000)
($100,000)
($100,000)
($100,000)
x
x
x
x
--------------100,000.00
--------------100,000.00
AIFG
AIFS
AIFR
AIFU
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Financial Training Department 16
How Endowment Income is Posted (continued)
Now we’re ready to look at MAR-(XX+1). Assume that we’ve obtained the following “STAT” rates 1:

AIFG (Guaranteed Rate) = 0.00435811

AIFR (Realized Gains) = 0.00085975

AIFU (Unrealized Gains) = (0.01561922)

AIFS (Spending Rule) = (0.00264937)
As we did in FEB-(XX+1), we calculate spendable income using AIFG. This month, however, we cannot
just use the balance of the original gift – we need to use the total invested assets of the endowment
fund. When you look at the FEB-(XX+1) statement on the previous page, you can see that this is
$100,000 + ($228.51) + ($4.36) + ($817.60) = $98,949.53. Multiplying this by AIFG (0.00435811)
results in $431.23. Once again, this amount includes overhead, so 80% is $344.98 – this is the amount
of derived cash that is posted in NAC 0.
Similarly, calculations for realized and unrealized gains must use the total invested assets of the
endowment. For realized gains, $98,949.53 x AIFR = $85.0718584175 – rounded to $85.07. For
unrealized gains, $98,949.53 x AIFU = -1,545.5144779666 – rounded to ($1,545.51). Finally, spending
rule distributions are $98,949.53 x AIFS = -262.1539162961 – rounded to ($262.15).
1
Note: the rates used in this example are from the actual period MAR-03
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Financial Training Department 17
How Endowment Income is Posted (continued)
Now we’re ready to look at the MAR-(XX+1) 114.ORG report:
UNRESTRICTED
NAC: 0
-----------ASSETS
Derived Cash
Investments (Fair Market Value):
Book Value – Orig Gift:
Direct Holdings
AIF
TEMP RESTRICTED
NAC: 1
---------------
PERM RESTRICTED
NAC: 2
---------------
------------
---------------
100,000.00
--------------100,000.00
------------
(490.66)2
80.71 3
(2,363.11)4
---------------
-----------690.78
--------------(2,773.06)
690.781
Total Book Value – Orig Gift:
Book Value: Spending Rule
Realized Gains/Losses
Unrealized Gains/Losses
Total Investments (Fair Mkt Value)
TOTAL ASSETS
--------------100,000.00
--------------100,000.00
Note that there was a slight difference in the spendable income distributions for FEB-(XX+1) and MAR(XX+1) - the March distribution of $344.98 was slightly smaller than the February distribution of $345.80.
This occurs because the negative “Book Value: Spending Rule” distribution is actually decreasing the
value of the endowment’s assets.
If you wanted to estimate how much money would be available to spend for the current year in this
endowment, you could take $345 and multiply by the number of periods left in the fiscal year (4 = APR,
MAY, JUN, ADJ). This means you could reasonably expect that $2,070 in spendable income (the current
month’s balance of $690 plus an additional $345 per month for the next four months) would be available
in this endowment fund. If our endowment fund received a new gift in March, how would this affect the
endowment, and our projection of available money to spend?
Balance
Balance
3
Balance
4
Balance
1
2
from
from
from
from
FEB-(XX+1)
FEB-(XX+1)
FEB-(XX+1)
FEB-(XX+1)
= $345.80 + $344.98 (total invested assets from prior period x current-period AIFG)
= ($228.51) + ($262.15) (total invested assets from prior period x current-period AIFS)
= ($4.36) + $85.07 (total invested funds from prior period x current-period AIFR)
= ($817.60) + ($1,545.51) (total invested funds from prior period x current-period AIFU)
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Financial Training Department 18
How Endowment Income is Posted (continued)
In terms of the spending distributions for MAR-(XX+1), nothing would change. Remember, new gifts are
not invested until the beginning of the next accounting period. So, the only change to our MAR-(XX+1)
114.ORG report would be the addition of the gift to “Derived Cash”:
UNRESTRICTED
NAC: 0
-----------ASSETS
Derived Cash
Investments (Fair Market Value):
Book Value – Orig Gift:
Direct Holdings
AIF
TEMP RESTRICTED
NAC: 1
---------------
690.78
50,000.00
------------
---------------
------------
(490.66)
80.71
(2,363.11)
---------------
-----------690.78
--------------(2,773.06)
Total Book Value – Orig Gift:
Book Value: Spending Rule
Realized Gains/Losses
Unrealized Gains/Losses
Total Investments (Fair Mkt Value)
TOTAL ASSETS
PERM RESTRICTED
NAC: 2
---------------
100,000.00
--------------150,000.00
--------------150,000.00
--------------150,000.00
At the beginning of APR-(XX+1), the new $50,000 gift would be invested, moving the balance from
“Derived Cash” to “AIF” within NAC 2:
UNRESTRICTED
NAC: 0
-----------ASSETS
Derived Cash
Investments (Fair Market Value):
Book Value – Orig Gift:
Direct Holdings
AIF
TEMP RESTRICTED
NAC: 1
---------------
PERM RESTRICTED
NAC: 2
---------------
------------
---------------
150,000.00
--------------150,000.00
------------
(490.66)
80.71
(2,363.11)
---------------
690.78
Total Book Value – Orig Gift:
Book Value: Spending Rule
Realized Gains/Losses
Unrealized Gains/Losses
Total Investments (Fair Mkt Value)
TOTAL ASSETS
--------------150,000.00
------------ ----------------------------You can’t
run a “mid-month”
114.ORG report,
so
690.78
(2,773.06)
150,000.00
you’d never see a report that has these figures – just
recognize that now that the new gift is invested, that
is included in the figures used to calculate the APR(XX+1) income distributions (see next page).
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Financial Training Department 19
How Endowment Income is Posted (continued)
Here are the “STAT” rates we’ll use for April:1

AIFG (Guaranteed Rate) = 0.00442315

AIFR (Realized Gains) = 0.00072461

AIFU (Unrealized Gains) = (0.00076916)

AIFS (Spending Rule) = (0.00215779)
As with previous periods, we’ll need to use the total invested assets of the endowment, which, looking at
the “interim” report on the previous page are $150,000 in original gifts plus realized gains of $80.71,
unrealized gains of ($2,363.11), and spending rule book value of ($490.66). The total of these is
$147,226.94.
Doing our calculations based on this value, we get a new spendable distribution of $651.206839661,
rounded to $651.21 ($147,226.94 x April’s AIFG rate). Removing overhead, 80% of this number is
$520.97 – this is the amount of derived cash that is posted in NAC 0 for April.
The other calculations:

Realized gains, $147,226.94 x AIFR = $106.6821129934 – rounded to $106.68

Unrealized gains, $147,226.94 x AIFU = -$113.2410731704 – rounded to ($113.24)

Spending rule distributions, $147,226 x AIFS = -$317.6848188626 – rounded to ($317.68).
1
Note: the rates used in this example are from the actual period APR-03
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Financial Training Department 20
How Endowment Income is Posted (continued)
Here‘s the APR-(XX+1) 114.ORG report:
UNRESTRICTED
NAC: 0
-----------ASSETS
Derived Cash
Investments (Fair Market Value):
Book Value – Orig Gift:
Direct Holdings
AIF
TEMP RESTRICTED
NAC: 1
---------------
PERM RESTRICTED
NAC: 2
---------------
------------
---------------
150,000.00
--------------150,000.00
------------
(808.34)2
187.39 3
(2,476.35)4
---------------
-----------1,211.75
--------------(3,097.30)
1,211.751
Total Book Value – Orig Gift:
Book Value: Spending Rule
Realized Gains/Losses
Unrealized Gains/Losses
Total Investments (Fair Mkt Value)
TOTAL ASSETS
--------------150,000.00
--------------150,000.00
Remember prior to getting the $50,000 gift, we projected about $2,070 in spendable income for the rest
of this year. Now that we have the gift, we can re-work our estimate of how much money will be
available to spend for the current year in this endowment. Our monthly spendable income distribution is
now around $520 and there are 3 periods left in the fiscal year (MAY, JUN, ADJ). This means you could
reasonably expect that $2,772 in spendable income (the current month’s balance of $1,212 plus an
additional $520 per month for the next three months) would be available in this endowment fund.
Because of rounding issues and market uncertainty, this estimate may be off by a fraction of a
percentage, but it should be a good working assumption.
Balance
Balance
3
Balance
4
Balance
1
2
from
from
from
from
MAR-(XX+1)
MAR-(XX+1)
MAR-(XX+1)
MAR-(XX+1)
=
=
=
=
$690.78 + $520.97 (total invested assets from prior period x current-period AIFG)
($490.66) + ($317.68) (total invested assets from prior period x current-period AIFS)
$80.71 + $106.68 (total invested assets from prior period x current-period AIFR)
($2,363.11) + ($113.24) (total invested assets from prior period x current-period AIFU)
….
Financial Training Department 21
Budgeting Endowment Funds
Budgeting is necessary for gift and endowment funds that have surplus cash balances and will have
expenses or other activity occurring in the unrestricted net asset class. Budgets can only be created in
NAC 0. Budgets that are not created and uploaded in the original Pillar budget load at the beginning of
the fiscal year must be created in BEN Financials through the Budget Journal Entry responsibility.
The total available resources in endowment funds basically consists of two components: carry-forward
balance and anticipated current income.
Carry-forward
Endowments (4xxxxx funds) allow surplus or deficit balances to be “carried forward” to the next fiscal
year. New endowment funds will not have any balance from prior years, so this category only needs to
be taken into consideration when budgeting existing gift and endowment funds. Carry-forward balances
appear on BEN Financials reports under the label “Prior Year (Surplus)/Deficit”. As the label indicates,
surplus balances appear in parentheses, because they are negative, or credit, balances. Deficits appear
as a positive number. If you have a deficit balance, you will not be able to budget the full amount of
expected current income, because you will need to reserve an amount sufficient to cover the deficit
carry-forward balance. Similarly, if you have a surplus balance, you can budget additional money over
and above what you anticipate receiving in current-year income, up to the amount of the surplus
balance.
Important: Due to the timing of the budget cycle, the Pillar budget is submitted prior to the end of the
fiscal year. This requires an estimated carry-forward amount to be used when calculating what resources
are available. You will need to adjust the budget accordingly if there are any differences between the
estimated amount and the actual carry-forward balance.
Several BEN Financials reports exist which give you information on “Prior Year (Surplus)/Deficit” (carryforward) balances. Those are described more fully in the Gift and Endowment Reports document, but
include the 10X.ORG, 205.SCH, 300.BUD, and 302.BUD reports.
Anticipated Current Income
The more complex component of determining what is available to be budgeted in endowment funds is
determining what the anticipated level of income is in the fund for the current fiscal year. Both existing
and new endowment funds will be authorized a certain level of spending during the current fiscal year.
….
Financial Training Department 22
Budgeting Gift and Endowment Funds (continued)
Anticipated Current Income, continued
For endowment (4xxxxx) funds, things get a bit more complex than they were for gift funds. Since the
gifts you receive will be invested, not spent, you must estimate the amount of income that those gifts will
generate over the course of the rest of the fiscal year. Most endowments are invested in the Associated
Investments Fund (AIF). Investment income is generated over the life of the endowment, and is
allocated in three ways:
1. Overhead
2. Re-investment into the AIF (or other endowment holdings)
3. Income distributed for spending
The amount of income generated will rise and fall based on the volatility of the stock market, making it
very hard to predict how much will be available to spend. Additionally, spending all of the income you
receive in a given year does not protect against inflation. In order to get around these problems, the
University uses the spending rule (see the section on “What is the Spending Rule?”).
The amount of anticipated income for endowment funds is available through two BEN Financials reports:
the 114.ORG Endowment Fund Summary Report and the 302.BUD Budgetable Amounts – Endowments
Report. Both reports have a label entitled “Projected Gross AIF Income for FYxx” (with “xx” being
whatever the current fiscal year is). This figure will give you the estimated income available for the
account before overhead is taken out. The amount available after overhead is applied is listed on the
114.ORG report under the “Projected Net AIF Income for FYxx” heading). Please note that these
numbers change each month based on the changing book value of spending rule assets, so the numbers
are a general estimate, not an exact figure.
The FY04 budgeting guidelines state that all AIF income should be budgeted in object code 4710, even
though some will arrive in 4810 from NAC 1. Overhead should be budgeted separately in object code
4792. This is a change from prior years, where the net income (total AIF income less overhead) was
budgeted in object code 4810.
….
Financial Training Department 23
Budgeting Gift and Endowment Funds (continued)
Anticipated Current Income, continued
When budgeting endowment accounts, it is important to remember that the University is required to
record pledges to give as well as actual gifts received. While actual gifts and pledges will both appear as
part of the total available resources in your funds, it is generally wise not to budget a gift until it is
actually received. In certain circumstances, where expectations of the gift are extremely high and certain
expenses must be incurred immediately, you may budget pledges, but be aware that by doing so you are
subjecting the University to risk – if the gift is subsequently not received, other sources of money will
need to be found to cover any expenses charged against that endowment fund.
Monitoring Income and Expense Activity
Once you have established a budget for your endowment account, you need to monitor it on a regular
basis to make sure that revenue and expense entries that occur in the fund are appropriate (see Financial
Policy 1402.5). Several BEN Financials reports exist to assist with this process, and will be discussed in
Gift and Endowment Reports document.
….
Financial Training Department 24
Appendix A: Common Abbreviations
AIF
Associated Investments Fund
BBA
Budget Balance Available
BEN
Business Enterprise Network
CGAA
Central Gifts Accounting and Administration
CNAC
Center Net Asset Class – first segment of a BEN account number
COA
Chart of Accounts
CREF
Center Reference – seventh (last) segment of a BEN account number
FASB
Financial Accounting Standards Board
FFE
Funds Functioning as Endowment; a “Quasi-Endowment”
FY
Fiscal Year
FYTD
Fiscal Year to Date
GL
General Ledger
NAC
Net Asset Class
OH
Overhead
OBJ
ORG
Object Code – fifth segment of a BEN account number; defines what type of transaction is
occurring
Organization – second segment of a BEN account number; “Department”
PROG
Program Code – sixth segment of a BEN account number
RESP ORG
Responsible Organization
TIF
Temporary Investments Fund
….
Financial Training Department 25
Appendix B: Glossary of Terms
Account
Asset Liquidation
Book Value
Carry-forward
Derived Cash
Direct Holdings
Encumbrance
Endowment
Fund
Gift
Grant
Market Value
Overhead
Pillar
Realized Gain/Loss
Spending Rule
Unrealized Gain/Loss
Refers to any 26-digit chart of account combination that can be used with a
given fund
Selling the assets in NAC 0 of an endowment fund (or NAC 1 after the
appropriate event or time period in a term endowment) in order to obtain
spendable cash. This should be a last resort as it decreases the future
spendable income produced by the endowment fund.
Base value of original gift or income on that gift – does not take into account
gains/losses on that value
Surplus or deficit balance from a prior fiscal year
Available cash balance of an endowment fund at any given time. Found only
in NAC 0 unless the account is a manual reclass; then there may be cash in
NAC 1 as well.
Assets managed by outside investment companies or investors but held by
the University
Money set aside in the budget for a transaction that has not yet occurred
Donor has stipulated as a condition of the gift instrument that the principal is
to be maintained inviolate and in perpetuity and invested for the purpose of
producing present and future income
Refers to the six-digit BEN Financials FUND number
Voluntary transfer of things of value where the University makes no
commitment of resources or services in return for gifts, other than agreeing
to put the gift to use as the donor designates
A transfer which is designed to support a specific project which involves a
specific commitment by the University and may require formal reporting,
disposition of property or the return of unexpended monies.
Full value of all assets within an endowment
A charge for administrative costs
University budget and resource planning system
Increases or decreases in the current market value of an endowment as a
result of sale of investments held by that endowment.
A University policy which specifies a fixed percentage of the current market
value of an endowment as the amount which can be spent during the current
fiscal year
Increases or decreases in the current market value of an endowment that
would occur if the investments held by that endowment were sold (“paper”
gain or loss)
….
Financial Training Department 26
Appendix C: Gift and Endowment Asset and Revenue Object Codes
The following list is current as of the last revision date on the cover of this guide. For the latest updated
listing of object codes, go to:
http://www.finance.upenn.edu/comptroller/accounting/gloc/index.shtml
123X – Contributions Receivable – the amount due from donors for their promises to give (pledges)
to give to the University
1230
Contributions Receivable
1238
Net Present Value Discount on Contributions Receivable
1239
Contributions Receivable, Allowance for Uncollectible – reduces receivable by an
estimate of the amounts which will not be collected
17XX – INVESTMENTS – Investments in Marketable Debt and equity securities
170X – Direct Holdings – Investments in marketable securities held by the University’s pooled funds
1700
Direct Holdings, Book Value
1701
Direct Holdings, Other
1702
Direct Holdings, Unrealized Gain/Loss
1703
Other Investments, Stafford GSLs
171X – AIF Investments – held by endowments in the Associated Investment Pooled Funds
1710
AIF: Investment, Book Value
1711
AIF: Investment, Realized Gain/Loss
1712
AIF: Investment, Unrealized Gain/Loss
1713
AIF: Spending Rule Investment, Book Value
1714
AIF: Spending Rule Investment, Realized Gain/Loss
1715
AIF: Spending Rule Investment, Unrealized Gain/Loss
174X – Investments held at Kapsick and Co.
1740
Investments, Kapsick and Co.
1741
Short: Investment, Realized Gain/Loss
1742
Short: Investment, Unrealized Gain/Loss
177X – Outside-Managed Investments – investments of assets held in trusts outside the University
1770
OM: Investment, Book Value
1771
OM: Investment, Realized Gain/Loss
1772
OM: Investment, Unrealized Gain/Loss
178X – Other Investments – held by Treasurer
1780
Securities
1781
Real Estate
1782
Other
1783
Non-Liquid Investments
44XX – CONTRIBUTIONS AND PRIVATE GRANTS
4400
Gift Revenue – General
4402
Overhead Charge on Gifts
4404
Realized Gain/Loss on Gift of Securities
4405
Overhead Recovery on Gifts
47XX – INVESTMENT INCOME – Revenue and related overhead charges from investments in the
Associated Investments Fund (AIF), the Temporary Investments Fund (TIF), or from separately invested
assets (Non-Pooled Investments)
470X – Income from directly held investments
4700
Investment income (earned)
4701
Realized Gain/Loss (earned)
4702
Unrealized Gain/Loss (earned)
4703
Realized Gain/Loss from currency transactions`
….
Financial Training Department 27
4704
Realized Gain/Loss from gifts of securities
4709
Reallocation of Investment Income (transfer)
471X – Income from AIF (Associated Investment Fund)
4710
AIF: Investment income
4711
AIF: Realized Gain/Loss
4712
AIF: Unrealized Gain/Loss
4713
AIF: Spending Rule Income
4714
AIF: Spending Rule Realized Gain/Loss
4715
AIF: Spending Rule Unrealized Gain/Loss
474X – Income from Kapsick and Co.
4740
Investment income, Kapsick
4741
Annuity Payments to Planned Gift Participants
4742
Unrealized Gain/Loss, Kapsick
477X – Income from OUTSIDE MANAGED INVESTMENTS - Assets held in trust by outside entities
4770
OM: Investment income
4771
OM: Realized Gain/Loss
4772
OM: Unrealized Gain/Loss
4773
OM: Miscellaneous Asset Income
478X – Income from TIF (Temporary Investment Fund)
4780
TIF: Investment income
4781
TIF: Realized Gain/Loss
4782
TIF: Unrealized Gain/Loss
479X – Administrative Fees and Overhead
4790
Administrative Charge on Investment Income
4791
Administrative Recovery on Investment Income
4792
Overhead Charge on Investment Income
4793
Overhead Recovery on Investment Income
48XX – RECLASSIFICATIONS AND TRANSFERS
481X – Revenue Reclassifcation
4810
Reclassification, endowment income
4811
Reclassification, operating gifts
4812
Reclassification, capital gifts
4813
Reclassification, overhead
4814
Reclassification, time-based
….
Financial Training Department 28
Deposit
Statuses
Pending
Submitted
Adjusted
Collection
Accepted
Batched
Holding
Deposit has
been saved,
but has not
been
Revision History
electronically
submitted to
Date
the Cashier’s
Office
December 18, 2003
(modifications
can still be
made to the
deposit)
Deposit has
been sent
electronically
to the
Cashier’s
Office
Deposit has
been
adjusted by
the Cashier’s
Office (either
up front or in
response to a
notification
from the
bank)
Foreign
deposit
waiting to be
collected by
the
University’s
bank
Deposit
verified by
Cashier’s
Office
Funds have
been sent to
the bank and
entries to the
BEN
Financials
general
ledger have
been
generated.
Cashier’s
Office is
unable to
determine
which deposit
line to adjust.
Deposit will
remain in
Holding
status for 24
hours, after
which the
Cashier’s
Page Number(s)
Topic
All
New User Guide
….
Financial Training Department 29